A small mobile start-up with global ambitions, Andrew Fisher's Shazam is showing that hyper-growth can also be profitable
Shazam is a small firm with a big reach. The UK mobile start-up has over 50m customers and is adding new users at a rate of 500,000 every week. "We're aiming to be ubiquitous," says chief executive Andrew Fisher. It's why the company, which employs 60 people in cramped west London offices, has just agreed a deal with US venture capital firm Kleiner Perkins Caufield & Byers, an experienced operator with significant stakes in both Google and Amazon.
"We recognised we needed some strength with the people that have backed some of the biggest consumer businesses," explains Fisher. "It wasn't about the money, it was about finding a partner that could genuinely add value."
The product is as clever as it is popular. Simply point a Shazam-enabled phone at an unknown piece of music and it will send you back an automated text message with the artist and song title, and even provide a link to buy the track. Rather neatly, the software cuts out unrelated background noise, allowing customers to name a musical score to a film or TV programme, and even to identify a song played in a busy pub or club.
Shazam was founded in the US by Berkeley business school students Chris Barton and Philip Inghelbrecht. The idea for a phone that could identify unfamiliar songs occurred to Barton while trekking in the Himalayas in 1999. On his return, he recruited Inghelbrecht and the pair began the search for investment. Pre-crash, Silicon Valley was one big bubble of capital, but the mobile sector was still relatively immature. It was a hard slog finding money in an unproven market.
The duo had better luck finding an audio specialist who could design the software. Trawling the country's universities, they eventually discovered Stanford PhD student Avery Wang, who became the firm's third founder. According to Inghelbrecht, Wang spent "day and night" building Shazam's unique software, which turns any piece of music into a distinct "numeric signature". When a track is played, the algorithm identifies frequencies of peak intensity, matching this numeric signature with one of the tracks from the Shazam database.
By focusing only on patterns of peak frequencies the software can ignore ambient background noise and produce more accurate results. According to Wang, the probability of an incorrect match is less than one in 300,000. Shazam can name a tune even when only one per cent of it is audible.
Still lacking capital, the trio was eventually forced to move the business to London, where they partnered with IDG Ventures and recruited a fourth co-founder, Dhiraj Mukherjee. With the money now in place, the founders turned their attention to finding a database of songs to go with it. Licensing music is an expensive business, and collecting a range of commercially successful tracks broad enough to cover users' varied enquiries would involve agreements with multiple rights' owners, adding complexity as well as cost.
The founders hit on a resourceful solution. At the time, Entertainment UK, owned by Woolworths Group, had the largest music database yet to be digitised. The founders tabled an offer. Shazam would digitise Entertainment UK's valuable catalogue of 1.5m songs in return for permission to create a proprietary database of the material. It was the first of many vital industry partnerships.
Wang is still involved in Shazam, as chief technology officer, but following three funding rounds the others all made their exits. Barton now works in Google's mobile division. Mukherjee works for Infosys. Inghelbrecht, a self-confessed "restless entrepreneur", is now the president of TrueCar. Andrew Fisher joined Shazam in 2005 from Infospace, where he was managing director of the firm's European operation.
When it first launched in 2002, Shazam was known as 2580, the numbers that form the spine of the phone keypad. Customers dialled the number in order to get their song recognised. It became a useful tool for pub quiz aficionados, says Fisher, but struggled to grow beyond niche use. "People would use it three times and then stop," he says. As hired CEO, Fisher's remit was to strengthen the industry partnerships Shazam had already made, and bring a much bigger audience to the company's unique software.
It was the growth of iTunes, and in particular the huge success of the iPhone's App Store, that fuelled Shazam's acceleration. Apple's App Store was "shape-shifting", says Fisher. "For the first time consumers had the confidence to download apps onto their phone. Suddenly you went from 50 apps on any device, of which people would discover three, to 85,000 apps in one App Store, of which an average consumer was downloading eight in the first week."
Shazam has now achieved 10m downloads though the Apple App Store alone. Subsequent partnerships with other mobile providers, such as Blackberry and Google's Android, have delivered more users in total than current dotcom darling Twitter.
"Over the last 18 months it's taken off," says Fisher. "We're in 150 countries, on 350 mobile operators-hockey stick adoption." It's a situation that makes him feel proud. "There have been very few successful UK mobile consumer brands and yet one of the strengths of UK technology is in mobile. We are quite proud of the fact we are doing something global."
Fisher appears fixated on size, and for good reason. No start-up, whatever its heritage, could even secure a meeting with a tier-one VC such as Kleiner Perkins without first proving its potential to scale. Fisher says Shazam is on track to hit 100m users by the end of 2010. At a current rate of 500,000 customers a week, that assumes there is sharper acceleration to come.
And beyond that? "We focus on the market forecast of six billion handsets by the end of 2011," he says. "Compare that to 1.7bn PCs, and the opportunity in mobile is approximately four times as large as it is for PCs." There's no reason, he says, "why Shazam shouldn't be on every mobile device" in the world. At the very least, he adds, "there is a significant opportunity for Shazam to hit 250m users and actually overtake some of the big online properties."
This is bold talk for a mere mobile app company, but it's a measure of how far the mobile industry has advanced. Comparing user base alone, Twitter expects to have around 18m active users (who log on at least once a month) by the end of the year. Facebook already has 120m users who access the service every day. So in terms of reach, it's possible to talk of Shazam in the same bracket as Facebook, particularly when you take into account an average Shazam usage of eight times per month. And Shazam is profitable. "We have people that use Shazam over 2,000 times a month," says Fisher, "but we don't need people to use it 100 or 200 times a month to be successful as a company."
Bolstering Shazam's position, says Fisher, is the fact that many users already pay for the service. "Our heritage is having users pay for Shazam. The iPhone was the first departure [from that model] where on our own money we funded a free offer to consumers." A large proportion of Shazam's user base (Fisher won't divulge the exact number) download the software for free. But Fisher says the company still makes money from these customers, either through advertising, or by selling songs though iTunes. In addition, he says, "some of our carrier partners pay us to make Shazam free to users." All in all, "there is no user we support that we don't get a revenue stream from," he says.
This is actually quite unusual. The most popular growth model for large-scale tech companies is to offer free access and work out how to make money from the user base later. Shazam has attracted paying customers right from the beginning. Plus, its users are paying for what is essentially a search function, which not even Google has worked out how to charge for. "The interesting thing is that our heritage is in discovery," says Fisher. "People generally don't pay for discovery in other mediums, so in the long term that element of the service is likely to become ad funded."
Shazam already serves adverts alongside its search results. Fisher says that as in most mobile applications, the ads have to be acutely targeted. Long-term, the company will likely follow the "freemium" model, offering a set number of free searches, balanced by a subscription fee for unlimited use, with access to extra features. It will also sell related items, such as concert tickets, and expand its social network function. Some of our users, Fisher says, "want the kudos of telling their peer group that they discovered the new 50 Cent track before anyone else. It's social currency for them to tag a particular song first."
Matt Murphy, a partner at Kleiner Perkins Caufield & Byers, says Shazam's scope will broaden considerably, particularly through the company's social network offering. "We're very enthusiastic about the opportunity for Shazam in helping people discover, manage, socialize, and buy music," he says. Shazam provides more of a "directed, curated experience" than sites like Twitter, he adds. "But ultimately it will broaden and a tremendous amount of traffic will be driven by discovery and socialization off the Shazam platform."
Shazam is proving a boon for the record industry. In the UK, an estimated seven million people download illegal tracks every year. The British Phonographic Industry (BPI) believes this costs record labels around £200m. Around eight per cent of Shazam users purchase the track after identification, an alarmingly high conversion rate that some industry executives find it difficult to believe. "A lot of our business partners question our eight per cent conversion rate given prior experience, but it's an achieved rate," says Fisher.
"We are one of the large growth drivers in the music industry. The reason is that music can be a very emotive purchase. If you hear U2's new single, a lot of people will decide then and there whether they like it and whether they want to buy it. If you can just click to purchase, the immediacy and immediate gratification means a lot of people don't mind spending 79p."
As Shazam's user base grows, so does the pressure on its database to remain up to date. "We need to be current in the nightclub: Taiwan, Chile, New York, London and Paris, this weekend. People will hold their phone up and they'll either get a result or they won't get a result. We will be measured on that."
What helps are the relationships Shazam has built with labels all over the world. "Shazam has a lot of support from the music industry because we are driving sales of licensed content. That's really important because without the artists' support we don't have a business. It's a win-win-we don't have to license content [from the labels]."
Fisher admits that investment from Kleiner Perkins will increase Shazam's chances of going public. He refuses to be drawn on when that might be, but previous experience has taught him that SMEs need to be "realistic" about whether public share offerings are right for their business, "particularly bearing in mind the quarterly obligation to hit results". An IPO would be "appropriate", he adds, "in terms of creating liquidity for our shareholders", but "we still see it as some time away."
For now, Fisher is concerning himself with one major question: "how big can Shazam be?" He believes Kleiner Perkins can help provide the answer. Is Shazam a billion-dollar business? "It has that potential or we wouldn't have invested," replies Murphy.